Examples

Post April 2008

Take an air-conditioned office building purchased for £10 million in 2010 by a Corporation Taxpayer with a 31st March year end. Capital allowances may have an apportioned value of say £2.9 million, of which £2.3 million qualifies as Integral Features, with the remaining £0.6 million qualifying as Plant and Machinery.

With a corporate tax rate of 28%, the first year saving alone to the investor’s tax bill in the year ended 31st March 2011 in this example will be £98,000 (28% of £120,000 plus £230,000). Taking account of the reduction in Writing-Down Allowances and Corporation Tax rates, there will be a saving of £219,320 over the first three year period.

Year Ended
31st March

Qualifying Plant & Machinery

Writing-Down Allowance

QualifyingIntegral Features

Writing-Down Allowance

Tax Relief to a Corporation
Taxpayer

2011

600,000

120,000

2,300,000

230,000

98,000

2012

480,000

86,400

2,070,000

165,600

65,520

2013

393,600

70,848

1,904,400

152,352

55,800

If this property has a 6% yield, it will be equivalent to only 4.32% after 28% tax. Capital allowances relief of £98,000 in the first year has the effect of increasing the net yield to 5.3%.

An overseas investor will pay tax at 20% on the income received, equivalent to £120,000 on the £600,000 rent. The first year’s capital allowances will therefore substantially reduce the first year’s tax liability!

Post April 2008 – Where a Comprehensive Claim has Previously been Made

Where a previous owner has made a comprehensive capital allowances claim on expenditure incurred prior to April 2008 and has brought a disposal value into account for the qualifying Plant and Machinery, by way of an Election under section 198 Capital Allowances Act 2001, possibly in the sum of £1 (see section on Sale of Buildings), it may still be possible to claim for certain Integral Features that previously did not qualify for capital allowances, such as cold water installations, lighting and general power.

Using the same air-conditioned office building purchased for £10 million in 2010 which has been subject to a previous claim relating to expenditure incurred pre April 2008 and where a £1 Election (CAA 2001) has been agreed, capital allowances on the unclaimed allowances may have an apportioned value of say £0.5 million.

With a corporate tax rate of 28%, the first year saving alone to the investor’s tax bill in the year ended 31st March 2011 in this example will still be £14,000 (28% of £50,000) despite the restrictions. Taking account of the reduction in Writing-Down Allowances and Corporation Tax rates, there will be a saving of £31,640 over the first three year period.

Year Ended
31st March

Qualifying Integral Features

Writing-Down Allowance

Tax Relief to a Corporation Taxpayer

2011

500,000

50,000

14,000

2012

450,000

36,000

9,360

2013

414,000

33,120

8,280

If this property has a 6% yield, it will be equivalent to only 4.32% after 28% tax. Capital allowances relief of £14,000 in the first year has the effect of increasing the net yield to 4.46%.

Pre April 2008

Take the same air-conditioned office building purchased for £10 million in March 2008, but allowances claimed in subsequent years. The Plant and Machinery might have an apportioned cost of say £2.4 million.

With a corporate tax rate of 28%, the first year saving alone to the investor’s tax bill in the year ended 31st March 2011 in this example will still be £134,000 (28% of £480,000). Taking account of the reduction in Writing-Down Allowances and Corporation Tax rates, there will be a saving of £295,104 over the first three year period.

Year Ended
31st March

Qualifying Plant & Machinery

Writing-Down Allowance

Tax Relief to a Corporation Taxpayer

2011

2,400,000

480,000

134,400

2012

1,920,000

345,600

89,856

2013

1,574,000

283,392

70,848

If this property has a 6% yield, it will be equivalent to only 4.32% after 28% tax. Capital allowances relief of £134,400 in the first year has the effect of increasing the net yield to 5.66%.

The information contained in our website is believed to be correct, but there may be errors or omissions for which PJB cannot be responsible. It is therefore essential to take advice on specific issues.